Moving finished goods from one country to another is not a simple task. As well as needing a truck and driver, there’s a ship or flight to book, customs, insurance and a host of other hurdles to jump.
And that’s where JSE-listed small cap Santova comes in, offering a one-stop solution. With the rise of digital ordering of goods and advances in technology, people might forget that the physical underpinnings of moving goods around the globe are rather more mundane — but crucial.
The fee levied by such service providers seems modest for the many permutations involved in moving goods, alongside sudden risks such as a ship blocking the Suez Canal or rebels targeting ships in the Red Sea. These global geopolitical issues often have benefits; as shipping costs rise, the percentage charged by freight forwarders rise, though it slumps as rates dive.
Santova boomed during the pandemic. The global crisis led to a surge in freight rates and online product ordering. The share price ran from 120c in March 2020 and topped out at 980c in June 2023. Since then Santova is down 22% as the world returned to normal and shipping rates slumped.
This was the main cause of recent results weakness: a 20.1% reduction in earnings to 124c a share; a drop in revenue, including net interest income, of 4.5% to R638m; and a fall in operating profit of 35.7% to R184m. NAV rose 27% to 611c a share. No dividend was declared as the company decided to keep its cash for possible acquisitions and fund share buybacks. Cash on hand sits at R477m.
Santova is not an easy company to understand. It operates in a logistics sector dominated by global titans such as DSV, Kuehne + Nagel and CH Robinson, as well as the shipping lines. All are vast enterprises; Santova is a specialist minnow by comparison.
Offshore revenue is 71% of the mix, giving Santova a rand hedge quality. The company operates in several territories, with its largest revenue contribution being the UK and South Africa at 37% each. In the UK, the corporate tax rate rose from 19% to 25%, hitting profits. Additionally, lower freight rates, less project work and general softening in client demand all contributed to a challenging year in all operating jurisdictions.
Offshore revenue is 71% of the mix, giving Santova a rand hedge quality
The company has a wide and varied client base with no one customer or sector dominating, aiding its overall positioning. Looking at the key areas of operation, in the UK profits declined 13.7% to R50.6m, the EU slumped 30.8% to R38.7m and Africa fell 19.4% to R50.9m. The biggest hit came from the Asia-Pacific region, where profits slumped 73.9% to R11.1m.
Santova managed the difficult period by reducing its debt and liabilities. It also picked up R30.6m of new business across its territories and has a strong cash position. Santova is continually looking for acquisitions, but comments that, given the low share price, the best use for the cash is buybacks rather than deals.
The sector continues to have challenges. Global freight rates are well off their pandemic best and during the shipping profit boom vast profits were recycled into new shipbuilding — these new vessels are now set to come online, further capping global freight rates.
The move to try to limit China as the global manufacturing hub has resulted in global companies moving production to new countries. Logistics companies thus have to set up new networks, at a cost. Santova says it is moving into Vietnam to adapt, as one example.
IM noted many calls from investors during the results presentation on May 16 for share buybacks to continue — and for management to unlock value by selling the entire company. IM notes management’s cautious stance of hoarding cash and skipping the dividend as Santova hunkers down during tough times for the global freight forwarding sector.
IM likes the stock — trading at 765c and a p:e of 6.1 — and the tenacious management, but has to recommend a hold until seas are calmer.
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